The world famous charities set up by billionaire tycoons find a mention in the news media once every few days. These people have chosen to spend a major part of their wealth on issues like social and environmental welfare. Their wealth has been created on the back of strong businesses. Will it not be great that companies also paying attention to such issues are also given their due credit?
This is the phenomenon that is now gaining momentum. Companies and businesses paying attention to environmental, social and governance issues have become an investment theme in themselves. The idea is simple. The large number of millennial population wants to be associated with businesses that make a positive contribution to the society.
Accordingly, there are funds that invest in such businesses after careful scrutiny. The number of such investment schemes globally has gone up from around 1100 in 2009 to over 3300 in 2020. The inflow of investment in such funds has risen from $21 billion to $154 billion in the same period.
This trend is now catching up in India as well. You can also invest in such businesses through ESG Funds.
What are ESG Funds?
These funds focus on three main issues. Environmental Empathy, Social Responsibility and Governance of Business. Basis these parameters, the companies are assigned a score on each of these factors. The higher the collective score, the better the company is in general for the society and environment. ESG Funds scan through the hundreds of companies in the market to find the handful companies that fit this bill.
From an Indian regulatory standpoint, ESG Funds fall under the thematic category of equity mutual funds. This means that these funds are open-ended equity mutual funds that invest at least 80% of their assets in companies that fall under the ESG Theme.
How are these companies selected?
The NSE has a Nifty 100 ESG Index, which includes companies that make the cut. The fundamental requirement for a company to make the cut is that it should be part of the Nifty 100 list. Further, companies involved in sin businesses like tobacco, alcohol, weapons or gambling are not considered. The third layer of scrutiny is the controversies that the business might face. If there are severe environmental, social or governance related controversies in a company, those companies are also removed from the list.
The end result is good quality businesses that undertake unquestionably ethical businesses and also are not involved in controversies. Moreover, if these companies add value to the society through their corporate social responsibility programs and corporate governance model, they rank higher on the list.
Do these companies perform well?
You might think that with so many restrictions, a company might not perform very well. However, that is not true. If market movements are an indicator of the future performance of the companies, the Nifty 100 ESG index has actually outperformed the Nifty 50 index in the most turbulent phase that the markets witnessed in the past 6-8 months.
While the Nifty 50 fell 37% in the crash early this year, the Nifty 100 ESG fell only 35%. While the Nifty did not fully recover by end August, the Nifty 100 ESG had already recovered fully. Moreover, such companies are likely to benefit as the government and regulators are taking more measures to safeguard the social and environment issues in the country. With issues like high air and water pollution, drinking water scarcity, etc quite rampant in the country, ESG investing is likely to contribute to addressing these issues while offering growth to related businesses.
What are your options?
This concept is largely unexplored in India, but is gaining popularity with the increasing awareness all around. ICICI Prudential Mutual Fund has launched an ESG Fund and the New Fund Offer for the same is currently underway. Apart from the above-mentioned factors, the fund will also leverage its own in-house research to sharpen the investment decisions. Moreover, the fund will also communicate with companies to suggest measures to enhance their ESG score. This new fund will be led by experienced professionals from ICICI Prudential Mutual Fund who have in the past handled and delivered on successful equity mutual funds.
If this concept of investing in ethical companies that are socially and environmentally conscious appeals to you, opting for an ESG Mutual Fund is a good option. What better way to grow your wealth than by contributing to businesses that are good for the society.
The author is founder of Intelli360 Wealth Advisors, Chennai and Dubai